Iran/US politics: Trump will win concessions on Iran deal

On May 12th the US president, Donald Trump, must choose whether or not to recertify the 2015 Iran nuclear deal (known formally as the Joint Comprehensive Plan of Action—JCPOA) and issue a sanctions waiver. He has been highly critical of the deal previously and has laid out a series of terms that must be met for him to keep the US within the JCPOA. We think that both the US's European partners and the Iranian government are keen for the JCPOA to be maintained and are likely to offer Mr Trump sufficient concessions for him to be appeased. However, we note that this is a tough call and that there is a high risk of the US removing itself from the deal.

Mr Trump has taken every opportunity to criticise the JCPOA, which lifted US and European sanctions in exchange for severe limitations on Iran's ability to enrich uranium fuel. The president's opposition to the deal stems partly from the fact that it was negotiated under the administration of his predecessor, Barack Obama, and partly from the fact that it focused solely on the nuclear programme and did not include other Iranian activities of which the US government disapproves, such as its support for the government of Bashar al-Assad in Syria. More broadly, Mr Trump has favoured strengthening the US's ties to its traditional allies in the Middle East—Israel and Saudi Arabia—at a time when tensions between these countries and Iran are rising.

The president also loathes the process—imposed on Mr Obama by Congress—whereby he has to confirm Iran's compliance under the deal every 90 days and issue a waiver confirming that sanctions will remain lifted every 120 days. In January he asked the US's European partners in the JCPOA—the UK, France, Germany and the EU—to address four issues before the next JCPOA announcement, on May 12th, or the US would withdraw from the deal. These were: new sanctions covering Iran's ballistic missile programme; expanding nuclear inspections to military sites; confronting Iran's "malign" activities in the region; and ending the sunset clauses in the deal that would allow Iran to resume enriching uranium after the current deal expires in 2030.

We believe that Mr Trump is serious about the threat of withdrawal. His position on Iran has been consistent. A fundamental disagreement on the JCPOA is believed to be a major reason why the president sacked his former secretary of state, Rex Tillerson. (Mr Tillerson was no zealous advocate of the JCPOA, but attempted a compromise with the Europeans.) The fact that Mr Trump appointed Mike Pompeo as Mr Tillerson's successor and John Bolton as his new national security adviser strongly suggests that he is unlikely to soften his views on Iran. Assuming that they escape the White House churn, the influence of these two men could mean that the JCPOA has no long-term future. However, we believe it unlikely that Mr Trump will follow through on his threat to pull the US out in May.

Europe to the rescue?

The biggest reason for this forecast is the position of the Europeans. Both the European signatories and the US largely agree that Iran's ballistic missile programme and its military activities in the Middle East represent destabilising security threats. Since Mr Trump issued his threat in January, France, the UK and Germany have proposed new EU sanctions separate from the nuclear deal on individuals connected to Iran's ballistic missile programme and its activities in the Syrian civil war as part of a supplementary deal to the JCPOA. These sanctions would have to be passed by all 28 members of the EU before being implemented, but we believe that they will consider that their business interests in Iran would be less likely to be damaged by new sanctions than by a disintegration of the JCPOA. The likely willingness of the Europeans to impose new sanctions represents a major concession to Mr Trump. The president's other two demands are much more difficult to meet, especially the sunset clauses, which would require a renegotiation of the JCPOA itself. The Europeans may consider putting on a united front with the US and insist that Iran come back to the negotiating table, but they would first want reassurance from the US that a withdrawal was no longer imminent.

New European sanctions are the first shift that we think will keep Mr Trump on side. The second is a congressional revision to the Iran Nuclear Agreement Review Act (INARA). The chairman of the Senate's committee on foreign relations, Bob Corker, has suggested that the recertification requirement could be revised from 90 days to 180. It is even possible that Congress could go further and scrap it altogether. We think that removing the recertification and waiver processes is essential for Mr Trump. If he were not confronted with making a decision on the deal several times a year, he would find it a lot easier to tolerate.

An alternative scenario

With these two concessions made, we believe that Mr Trump will decide to remain in the JCPOA. However, we note that this is a finely balanced forecast. As such, we think that it is necessary to outline two other scenarios, to each of which we ascribe a moderate level of probability. In these cases, either the Europeans or Congress fail to make their concessions, or the concessions are not sufficient for Mr Trump and his hawkish national security team. Mr Trump then refuses to certify the deal and issue the sanctions waiver. This would put the US in violation of the terms of the JCPOA.

Mr Trump would then have to decide whether or not to pull down the entire JCPOA. He has the power to do so under the terms of its agreement. When it was drawn up, the signatories were so concerned about Iran flouting the rules that they allowed any participant to unilaterally reimpose previous sanctions on Iran if they believed that it was not following through on its side of the bargain. The prospect of one of the signatories going rogue—in this case, the US—and arguing that Iran was non-compliant without any evidence, was not considered.

However, it is far from certain that if Mr Trump withdrew the US from the deal he would also bring the JCPOA crashing down with him. To do so would put the president out on a limb. The other partners all want the JCPOA to be maintained, as does Congress. Instead, Mr Trump could withdraw the US and impose some or all of the US's previous sanctions but leave the framework of the JCPOA intact. He would not need congressional approval to do this. Nevertheless, we note that a JCPOA operating at a time of reimposed US sanctions would make working within it more difficult for the other signatories. For example, if the US again banned Iranian oil exports this would leave European oil and gas companies who purchase Iranian oil and have exposure to the US economy vulnerable to US fines.

Were the US to withdraw (but keep the JCPOA alive) we believe that there would be four major effects. First, the Iranian economy would be hit by declining investor sentiment surrounding restored US sanctions and constraints on oil exports. This would drive down the rial, pushing up inflation and in turn adding to popular frustrations at home. Second, security threats in the Middle East would rise, with Iran and its proxies likely to play a more aggressive role towards US troops in Syria, for example. Third, global oil prices would rise temporarily, owing to the shock of the announcement, although beyond that any fall in Iranian production would be offset by higher Saudi output, which would return prices to their current levels. Lastly, relations between the EU and the US would suffer a severe setback, with the Europeans frustrated that diplomatic efforts had been in vain.

A tighter squeeze

We believe that the balance of probability is tilted slightly towards the US remaining in the JCPOA, on the proviso that the Europeans and Congress deliver several of the reforms that Mr Trump has requested. In this situation, he would be able to claim, justifiably, that he has broadened and deepened the restrictions on Iran, while also maintaining the US's leverage over its nuclear programme. This ought to play well with his political base. However, we note the substantial risk that his new national security team could influence his decision, and the attraction of dismantling another key policy of the Obama administration remains considerable.